Strong Yen Says Passing Trump Agenda May be Tough Task for Lawmakers

The price action on the charts the last two weeks indicates the sell-off in the USD/JPY is starting to pick up traction. The weak close also suggests that investors should start preparing for an acceleration into the low of the year at 111.583 and an eventual break into at least 109.919.

One telltale sign that this Forex pair is weak is the Japanese Yen’s divergence from the carry trade. Japan’s prolonged move into negative rate territory should have put continuous pressure on the Japanese Yen, but instead it’s strengthening as appetite for using the currency to fund aggressive bets on higher risk assets wanes.

Since the first of the year, the Dollar/Yen has been trending lower. The series of lower tops and lower bottoms strongly suggests that investors are shorting the Forex pair on rallies. However, last week’s price action suggests that investors may be forced to sell weakness. Sellers may come in early to drive the market into the February 7 bottom at 111.583, but this may be enough to trigger sell stops that could fuel an acceleration into the key 50% retracement level at 109.919.

After reaching its low for the year on February 7, the USD/JPY consolidated before surging to the upside on February 9. This move led to a rally into 114.950 on February 15. Since then the market has trended lower, reaching 111.926 on February 24.

The catalyst that triggered the rally between February 7 and February 15 was President Trump’s announcement that his promised tax reform plan would be announced in a few weeks.

“Lowering the overall tax burden on American business is big league…that’s coming along very well. We’re way ahead of schedule, I believe. And we’re going to announce something I would say over the next two or three weeks that will be phenomenal in terms of tax,” Trump said.

Well two weeks was up on February 23 and the market was hit with this bombshell from Treasury Secretary Steve Mnuchin. He said on this date that he wants to see “very significant” tax reform passed before Congress’ August recess, in what could prove a tough task as lawmakers work through a complex agenda.

Trump is scheduled to speak before Congress on February 28. At this time, I expect him to continue to reiterate his promises for fiscal spending, tax reform and relaxed regulations. However, I believe the financial markets will react differently to his remarks on economy policy.

The reaction by Japanese Yen investors will be the key to determining how much faith investors are putting into Trump’s promises. I base this conclusion on the fact that investors have been treating the Yen as a safe-haven currency and not a funding currency. With the stock market at all-time highs, one would have thought the Dollar/Yen would be sky-rocketing. Instead it has been weakening.

Even with Trump’s expected promises, the USD/JPY is telling us that there is fear in the market and that investors are heading into safety. Worries over the French presidential election may also be behind the Japanese Yen’s strength, however, it doesn’t take place until April. I think last week statement by Mnuchin will go a long way in saying that Trump’s ability to accomplish any of his promises could prove to be a tough task. I think that investors know this too and are betting against Trump by buying the Japanese Yen.